Assignment:
Assignment 4: Bonds (class 6)

Please answer all questions.

1. Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

a. What was the price of this bond when it was issued?

b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

c. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

2. Suppose you
purchase a 30-year, zero-coupon bond with a face value of $100 and a yield to maturity of 6%. You hold
the bond for five years before selling it.

a. If the bond’s yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?

b. If the bond’s yield to maturity is 7% when you sell it, what is the internal rate of return of your investment?

c. If the bond’s yield to maturity is 5% when you sell it, what is the internal rate of return of your investment?

d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.